SEC Cautions Investors on Risks of Buying Reverse-Merger Stocks

The U.S. Securities and Exchange Commission cautioned investors about buying stakes in companies that gain listings on U.S. exchanges through so-called reverse mergers, saying they may be prone to “fraud and other abuses.”

Many of the companies, often overseas operations that access U.S. markets by acquiring publicly traded firms with few or no operations, “either fail or struggle to remain viable” and may use small audit firms that don’t verify financial statements, the SEC said today in an investor bulletin.

“Given the potential risks, investors should be especially careful when considering investing in the stock of reverse-merger companies,” Lori Schock, head of the SEC’s investor education office, said in a statement.

Today’s warning comes more than a year after the SEC formed a task force to examine China-based reverse-merger companies and their auditors. The SEC and exchanges have halted trading in more than a dozen such firms in recent months, citing missing financial information, according to the release. Several such companies have seen their share prices plummet amid allegations that their financial statements were inaccurate.

In a reverse merger, a closely held firm buys a so-called shell company and becomes able to sell shares without the scrutiny that would surround an initial public offering. More than 150 Chinese firms with a market value of $12.8 billion have entered U.S. markets through reverse mergers since 2007, according to the Public Company Accounting Oversight Board, which oversees auditors of public companies.

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